stock markets in bubble economy

7/25/2019 Stock Markets in Bubble Economy

http://slidepdf.com/reader/full/stock-markets-in-bubble-economy 1/3

In fnancial terms, investors and advi-

sors have been told for decades, all this

is scientifc: Post-Modern-Portfolio-The-

ory, Markowitz (Nobel prize), Black-Sholes

(Nobel prize), Monte-Carlo, the “blessings”

of diversifcation and passive investing,

then the recent ood of nice abbrevia-

tions like TARP, ZIRP, MiFID, ESM, EFSM

etc., or rather spots on the camouage

of the century old Big Money lab trial

of monopolist Central Banking, the

biggest “fat” money experiment the

world has seen ever. There’d been his-

torical warnings from the beginning,

of course, that something had been

wrong with the fundamentals like Wil-

son’s regret, the Great Depression, theExecutive orders 6102 and 11110, then

Fort Knox, De Gaulle’s claim for gold,

the petrol dollar created, LTCM and

the recent New Economy of QE! Let us

stop here for a minute. QE Economy?

A missing link to investments? Yes,

once risk (the probability of losses) becomes

relative to certain market players, and

access to easy money is not equal

across the markets, and intervention

(of governments and central banks) becomes the

rule not the exception, then all the nice

investment theories above, part of the

classic economy, do not help to shape

a reasonable portfolio. Just remem-

ber the discussions after the August

market drop: the focus hasn’t been on

what actually happened and especially

not why, but about September Fed rate

hike, QE4 (after 3 called Inf nity…) and how

the Chinese government intervenes to

keep asset prices aoat (attempting to pre-

vent bubbles from popping). However, the real

discussion went on outside the main-

stream media: what Tobin’s Q-ratio says

about the current stock market levels,

how currency wars destabilize markets,

what’s the impact of the GREAT CREDIT

uNWINDING on the stock markets, the

outlook for the (euro)dollar, SDR and

__________________________________________

TRUSTING N°8 – July/December 2015 121

Practical Investing / INVESTING

Stock Market:

The Biggest Bang for your buck ever!

We live big times: Big money, Big debt, Big bubbles, Big govern-

ment, Big regulation.

You get all the stories ready: the world has to be saved, some (usu-

ally the banks) bailed out to prevent collapse at any price, othersto be punished at the same time, these are indebted governments

which actually means the sorvereign, so in the end ALL the bills go

to the taxpayer, i.e. the normal citizen.

This is the new Social Contract of modern times.

Dr. Zoltan

Luttenberger



the new BRICS fnancial system, and

(this is our main point) how to invest at the

top of such a bubble in stock markets

(as well)? You can say of course, QE ”n+1”

can be launched any time, and the Chi-

nese (still) can lower interests and so on,

but money creation (“easing”) worked inthe end like drugs: the bigger dose, the

less impact!

The 3 common charts tell the story

about the Century of Big Paper Mon-

ey or, more precisely, Fiat Money. One

possible reading, that after the cred-

it expansion triggered bull market of

the 80s and 90s the dotcom bubble

launched a secondary bear market and

according to the charts we’ve seen a

deferred and leveraged recurrence of

the Great Depression, with a much big-ger amplitude and probably also on a

longer timescale OR a radical reform of

the global fnancial system shall clear

the way for a next bull market soon?

This would explain the desperate ef-

forts of central bankers to generate

ination by printing (issuing) more and

more money. However, even if that

worked, it just blows more and bigger

bubbles to burst later, and adds to the

pains of normalization, says the Austri-

an School ( www.mises.org ).

The key lesson for intermediaries is that

product sales and passive investing

does not really work in deating-bub-

ble markets any more, as risk percep-

tion and measuring of real risk need

a fresh look, and suitability can be ad-

dressed only if there’s a common un-derstanding with your clients about the

asset classes. No one fts-all approach

works: what’s a safe asset for the one,

is a don’t touch for the other. None of

them is wrong ex ante, and the advi-

sor’s real task is to evaluate the scenar-

ios and to feed relevant and unbiased

information clients need to make their

own judgment. So, while you’ve got

the “holy scientifc” model of fnancial

markets ready as a mandatory part of

your college or certifcation curriculum,

from the broker-dealer or product ven-

dors you work with or even from new-

born robo-advisors, now you can’t es-

cape making your OWN ASSuMPTIONS

about asset classes and particular in-

vestments.

This is a clear shift in the investment

process that, unfortunately, asks for

much deeper knowledge than the aver-

age advisor ever had. It includes mas-

tering the contrarian view to “scientifc

fnance” as well. The once “product

seller” (whether in a bank or tied or independent)

distributing nice colored product bro-

chures has turned into a “model sell-

er” presenting an investment solution

made up of risk-profling and other

suitability assumptions according to

the focus of recent regulatory whammyworldwide.

Furthermore, the client gets another

piece of “scientifc evidence”, the out-

come of the risk questionnaire and even

nicer color pies about the optimal port-

folio allocation created on the scientifc

(again) base of Modern Portfolio Theory.

How nice!

But how did this happen? No one real-

ly knows… certainly neither the clients,

nor the advisor, since the solution came

from the Holy Corporate Black Box builtby “Best of breed” Experts, Softwares

and Scientifc models under the hood

of Compliance Excellence, Quality As-

surance, Awards and Certifcations.

Common sense? Not here please. Have

you ever seen this term in the regula-

tions? ...or the brochures? ...or in a cur-

riculum, or in an exam questionnaire?

Not me.

I remember that, when introducing a

multi-scenario asset class table and the

__________________________________________

TRUSTING N°8 – July/December 2015122

INVESTING / Practical Investing



corresponding model portfolio projec-

tions a couple of years ago to a HNWI

client, there is always a possibility of

di erent cases and outcomes or, from

the client’s point of view, that THERE IS

A CHOICE. It triggered an immediate

re-balancing action to optimize the ex-

pected long term outcome or, in fnan-

cial slang, to immunize the portfolio

against the potential (negative) outcomes

of certain scenarios the client wasn’t

happy with. So, while banks struggle

to accomplish reasonable stress tests,

you should just show to the client that

there is a choice, which means several

hours and days of additional real work

- supposed that you’re able and willing

to support free choice!

Two more trends make the life of the

fnancial advisors hard. DIY (Do-it-Your-

self ) clients represent a growing part of

investors in the Internet age, when ro-

bo-advisors have emerged as an alter-

native tool. Then, also thanks to easy

money, socialist governance became

common meaning that citizen’s wealth

isn’t safe from bail-in actions any more.

Here steps in CIFA’s Charter of Investors’

Rights to save legitimate wealth, thebase for a free market, from govern-

mental excesses.

So, you’ve been actually getting the

BIGGEST BANG for your buck in the

stock markets EVER! Good news isn’t

it? Whether it is a TOP or a POP, let us

wait for.

Zoltan Luttenberger

__________________________________________

TRUSTING N°8 – July/December 2015 123

Practical Investing / INVESTING

_________

Zoltan Luttenberger PhD has been working in the FS industry since1989 as (independent) fnancial plan-ner, management and IT consultant.www.linkedin.com/in/luttenberger

Zoltan Luttenberger PhD is a

Founding Partner of the “EuropeanTransition Program in FinancialAdvice™”

Zoltan Luttenberger PhD is Memberof the Board (in charge of Interna-tional Relations) and the FoundingChairman of the Hungarian Associa-tion of Qualifed Financial Planners.www.HAQFP.org

He is also a member of the CIFA’sExecutive Committee.

stock markets in bubble economy

Documents